Anna, owner and manager of Anna's Decoration, has been receiving some complaints from her clients. For example, one of her loyal customers, Elinor, wanted to know why she was being charged a much higher price for an order that was almost identical to an order she placed last year. Elinor felt that the price hike was simply not justified.

Although Anna, when responding to Elinors complaint, blamed the price hike on the rising price of materials, she herself was a bit perplexed and decided to look into the matter. Anna asked her accountant to prepare a report for her summarizing cost and pricing data for the last 3 years. The accountant presented this information in the following table:

	Year 1	Year 2	Year 3
Budgeted Results
Revenue	$2,400,000	$2,700,000	$2,000,000
Direct materials	360,000	405,000	320,000
Direct labor	720,000	810,000	650,000
Variable factory overhead	144,000	162,000	130,000
Fixed variable overhead	400,000	400,000	400,000
Variable selling and administrative expenses	240,000	300,000	220,000
Fixed selling and administrative expenses	200,000	180,000	200,000
Actual Results	Year 1	Year 2
Revenue	$2,320,000	$2,800,000
Direct materials	380,000	430,000
Direct labor	725,000	900,000
Variable factory overhead	140,000	160,000
Fixed variable overhead	425,000	440,000
Variable selling and administrative expenses	260,000	300,000
Fixed selling and administrative expenses	180,000	200,000

Anna believes that the last few years have been fairly representative of business volume in general. Moreover, Anna believes the average of the direct labor cost for years 1 and 2 is a fair estimate of her normal volume of business.

Anna next turns her attention to how she prices incoming jobs. When her company receives an order, Anna estimates the direct labor and material costs for the job, and then she applies an overhead amount to the job. Each year, the firm computes a budgeted overhead rate per dollar of direct labor. The company then prepares the order quote by adding direct material costs, direct labor costs, and applied overhead, and a 50% markup on total cost.

Anna retrieves information corresponding to Elinors order in year 2 and compares it with the price quote the company prepared for Elinor for the most recent order in year 3. Anna is not an accountant, but she is a good manager and can understand why Elinor complained.

Required:

1. Compute the total overhead application rates for years 1, 2, and 3.

2. Compute the overapplied or underapplied overhead for year 1 and year 2.

3. The following information pertains to Elinors order in year 2, and her current order for year 3, which is identical to year 2 order.

	Year 1	Year 2
Direct materials	$15,000	$15,500
Direct labor	$30,000	$32,000

Compute the price charged for the year 2 order and the price quoted for the year 3 order.

4. Do you agree with Elinor that the price being quoted for her year 3 order is too high?

5. What should Anna do? Can you suggest an alternative way for Anna to develop her price quotes? Explain.

P.S Please make sure to answer in details and correctly.